Monday, February 14, 2011

Stephen Smale Presciently On Global Financial Crisis?

I have argued before that weaknesses in mainstream economics exposed by our current macro-economic problems have been known for decades. I here note another example.

Stephen Smale is a Fields medal-winning mathematician who has advanced our understanding of chaotic dynamical systems. Smale has also contributed to mathematical economics. He wrote the following in 1976:
"A criticism commonly made of economic theory is its failure to make predictions of crises in the country or anticipate correctly unemployment or inflation. One must be cautious in the social sciences about looking towards physics for answers. However, some comparisons with the physical sciences seem profitable in connection with the above criticism. In those sciences, where theory itself is in a far more advanced state, limitations can be seen in a similar way. For example a given individual human body functions according to physical principles; however no physical scientist would predict a heart attack. The physical theory gives understanding of aspects of what goes on in the human body only under very idealized conditions. The physical theories eventually play some role in the education of medical doctors, who can then say some things, some times about a patient's susceptibility to a heart attack, preventive measures, and cures.

The economy of the world or even a nation is a very complex phenomenon, like a human body, involving a number of factors, both economic and political. It is no more reasonable to expect economic theorists to predict a nation's economic future than for a theoretical scientist to predict the future health of an individual...

...I would like to give some reasons why I feel equilibrium theory is far from satisfactory. For one thing the theory has not successfully confronted the question, 'How is equilibrium reached?' Dynamic considerations would seem necessary to resolve this problem. Another is the reliance of the theory on long range optimization.

In the main model of equilibrium theory, say as presented in Gerard Debreu's Theory of Value, economic agents make one life-long decision, optimizing some value. With future dating of commodities, time has almost an artificial role." -- Stephen Smale. "Dynamics in General Equilibrium Theory." American Economic Review V. 66, N. 2 (1976): pp. 288-294.

3 comments:

Anonymous said...

So critics of the mainstream may publish in the AER? I should become more "heterodox", too.

Robert Vienneau said...

Where's your pseudonym?

Not everybody I quote or praise is necessarily non-mainstream or heterodox. I don't know how Smale sees himself. I guess he is a leftist and opposed the Vietnam war, for what that's worth.

The start of the quote in the post reads to me as a defense of the mainstream that could have been published yesterday. The end of the quote shows that explaining non-equilibrium dynamics in General Equilibrium has been on the agenda a long time (actually back to the early 1960s). Lucas' faction in macroeconomics, I gather, rules the question out of bounds.

What is heterodox and what is non-mainstream varies with time and place. I like John Davis' taxonomy. That said, Joan Robinson published in the AER in 1972, not that mainstream economists nowadays pay any attention to anything she said.

(I suspect Google's spam filter will put your comment in moderation if you have that many links.)

Rodrigo Andrés de Souza Peñaloza said...

Stephen Smale made significant contributions to the theory of general equilibrium, specially within the mathematical framework of global analysis. Though he was a critic of the power of economic mainstream to predict crises, it is not correct to label him a heterodox economist. Quite the contrary, his works are pure mainstream economics.